Ellerston Capital sees Fletcher as a turnaround story

Ellerston Capital, with interest in 5.1% Fletcher stake,
sees builder as a turnaround story

By Jonathan
Underhill

April 16 (BusinessDesk) - Ellerston Capital's
interest in Fletcher Building has topped 5.1 percent,
requiring the Australian fund manager to make a statement to
the ASX and NZX but its interest in the beat-up construction
and building materials company has been no
secret.

Ellerston holds Fletcher in at least two of the
funds it manages. In its Ellerston Australian Share Fund,
the firm name-checks Fletcher as one of three turnaround
stories - "sound businesses that have historically generated
poor returns or under-earned versus their potential, are in
transition and where we think earnings/returns will improve
over the medium term".

The fund manager, which oversees
about A$5 billion in investments, also holds Fletcher for
its Ellerston Australian Market Neutral Fund - one of two
investments in the building materials sector that it holds
along with Adelaide Brighton. Ellerston has been buying
Fletcher in the face of the company's ongoing bad news. "We
added to our pair within the building materials sector, with
both Fletcher Building (-5.1%) and Adelaide Brighton (-
3.0%) underperforming the broader market," it says in a
March fund report.

Fletcher shares surged on Friday after
a report that Wesfarmers might be building a stake, with the
shares possibly being warehoused by a third party with the
intention of making a more substantive offer. However,
Fletcher said on Friday it knew nothing about the report.
The stock advanced 2.5 percent to $6.50 in early trading
today and has fallen 17 percent this year.

"Ellerston are
an active, value-focused investor – with Fletchers trading
at its lowest stock price since 2010 I am not surprised to
see a value-focused fund adding to existing investments,"
said Shane Solly, a director at Harbour Asset Management. "I
don’t know the details behind the entities but some may
relate to funds managed by Ellerston in the same way that
all fund managers manage their clients
investments."

Fletcher slumped to a $273 million loss in
its first half, driven by losses at its Building + Interiors
unit, and chief executive Ross Taylor has embarked on a
strategic review of the entire company, with details to be
announced in June. It had to get waivers from lenders after
breaching covenants and is still in talks with its US
noteholders and bank syndicate to negotiate new lending
terms.

That's led to speculation the company could shed
non-core businesses although Taylor has said the problems
are largely confined to B+I and the remainder of Fletcher's
building products, distribution and construction units are
performing to budget.

Chairman Ralph Norris announced in
February that he was stepping down to take responsibility
for the losses and provisions and in a letter to
shareholders that month he said: "As you are aware, Fletcher
Building is a diversified building company, comprising more
than 30 businesses with operations that span the entire
building supply chain. The majority of these businesses are
performing well, and are benefiting from supportive market
conditions."

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